This paper investigates the regional air pollution effects that could result from new opportunities for inter-regional power transmission in the wake of more competitive electricity markets. The regional focus is important because of great regional variation in the vintage, efficiency and plant utilization rates of existing generating capacity, as well as differences in emission rates, cost of generation and electricity price. Increased competition in generation could open the door to changes in the regional profile of generation and emissions.

We characterize the key determinant of changes in electricity generation and transmission as the relative cost of electricity among neighboring regions. In general, low cost regions are expected to export power generated by existing coal-fired facilities to higher cost regions. The key determinant of how much additional power would be traded is the uncommitted electricity transfer capability between regions, including its possible future expansion. The changes in emissions of NOx and CO2 that result are modeled as a function of the average emission rate for each pollutant in each region, coupled with assumptions about the extent of displacement of nuclear or coal-fired generation in the importing regions. Finally, we employ an atmospheric transport model to predict the changes in atmospheric concentrations of in each region as a consequence of changes in generation for inter-regional transmission.

In the year 2000, we estimate national emission changes for NOx could increase by 213,000 to 478,900 tons under the scenarios we think most likely, compared to the baseline. Under our benchmark scenario, we find national emissions of NOx would increase by 349,900 tons. The changes in NOx emissions should be considered in the context of an expected decrease in annual emissions nationally of over 2 million tons that will result from full implementation of the 1990 Clean Air Act Amendments over the next few years. The increase in emissions that we estimate serve to undo a small portion of the expected improvement in air quality that would occur otherwise. Nonetheless, these changes would yield relative increases in atmospheric concentrations of particulates with measurable adverse health effects.

We estimate the consequences for increased national CO2 emissions will range from 75 to 133.9 million tons. Our benchmark suggests an increase of 113.50 million tons, equal in magnitude to about 40% of the reductions needed by the year 2000 under the Climate Change Action Plan.

Our estimate of NOx emission changes is less than other studies, with the exception of the FERC EIS, primarily because we explicitly take into account capacity constraints on inter-regional transmission and use different emission rates. Our estimate is greater than the FERC EIS because we allow for a portion of the power generated for inter-regional transmission to meet new demand stimulated by an anticipated decline in price. Second, we allow a portion of imported power to back out higher cost nuclear rather than fossil baseload. These are important economic changes that we believe will characterize a more competitive industry, and which point toward potentially more significant environmental consequences than recognized in the FERC EIS. Because we focus on increased generation from coal facilities, we characterize our findings as a worst case interim outcome under restructuring. However, we also think it is the most likely result of increased competition resulting from industry restructuring over the next few years. Our estimated emission changes are compared with those of previous studies in Table 13. The features of these various studies are summarized in Table 1.

Our analysis of alternative scenarios yields considerable variation in the predicted levels of emissions and where they occur. This leads us to offer our results with caution, and to have less confidence in the outcomes of previous studies because of the sensitivity of results to the variety of factors that we think important.

One of the central questions in the restructuring debate concerns what would happen to air quality in regions neighboring those where generation may increase, with special concern focused on potential changes in the Northeast. We find the changes in pollutant concentrations resulting from changes in NOx emissions (excluding secondary ozone changes) would be substantially greater in regions where generation is increasing than in neighboring regions. The region likely to experience the largest adverse changes in air quality resulting from changes in generation is the Ohio Valley (the ECAR power pool region). For instance, in our benchmark scenario, the population weighted changes in atmospheric concentration of nitrates is 2-3 times as great in the Ohio Valley and the Southeast (SERC) as in the Mid-Atlantic region (MAAC) and 3-4 times as great as in the Northeast (NPCC). These results are reported in Tables 11a and 11b, and illustrated graphically in Figure 2 of the conclusion.

The likelihood of adverse impacts on NOx and nitrate concentrations in some regions as a result of restructuring suggests the need for a policy response to ensure that electricity restructuring does not lead to significant environmental degradation in any one area. If these changes merit a regulatory response, the regional variation in effects, and various sources of uncertainty about effects that may result, suggest the need for a flexible policy. One flexible approach that would ensure that changes do not lead to significant environmental degradation in any one area, while also avoiding unnecessary investments where emission changes do not occur, would be an intra- regional cap and trade program for NOx emissions from electric utilities. However, such an industry-specific program should be eclipsed if a more comprehensive program can be implemented by EPA permitting cost savings from inter-industry trades.